Lazard Inc (LAZ) 2015 Q1 法說會逐字稿

Good morning, and welcome to the Lazard's first-quarter 2015 earnings conference call. This call is being recorded.

(Operator Instructions)

At this time, I'd like to turn the call over to Judi Frost Mackey, Lazard's Managing Director of Global Communications. Please go ahead, ma'am.

Good morning, and thank you for joining our conference call to review Lazard's results for the first quarter of 2015. Hosting the call today are Kenneth Jacobs, Lazard's Chairman and Chief Executive Officer; and Matthieu Bucaille, Chief Financial Officer. A replay of this call will be available on the Lazard website, beginning today by 10 AM Eastern Time.

Today's call may contain forward-looking statements. These statements are based on our current expectations about future events and are subject to known and unknown risks, uncertainties, and assumptions. There are important factors that could cause actual results, level of activity, performance, or achievements to differ materially from those expressed or implied by the forward-looking statements. These factors include, but are not limited to, those discussed in Lazard filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and current reports on Form 8-K. Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements.

Investors should not rely upon forward-looking statements as predictions of future events. Lazard is under no duty to update any of these forward-looking statements after the date on which they are made. Today's discussion may also include certain non-GAAP financial measures. A description of these non-GAAP financial measures and a reconciliation to the comparable GAAP measures are contained in our earnings release, which has been issued this morning.

For today's call, we will focus on highlights of our performance. The details of our earnings can be found in our press release issued this morning and in our investor presentation, both of which are posted on our website. Following their remarks, Ken and Matthieu will be happy to answer your questions.

I'll now turn the call over to our Chairman and Chief Executive, Ken Jacobs.

Good morning. Lazard continues to generate strong results for clients and shareholders. We achieved record first-quarter operating revenue of $581 million, with record first quarters in both our businesses. As we said before, we don't read too much into one quarter, but the long-term growth trend is strong. On an LTM basis, Lazard's operating revenue has increased for eight consecutive quarters. We have achieved this in a macroeconomic environment that continues to be uneven. Our steady growth underscores the power of our business model, the breadth and depth of our global franchise, and the value we create for clients.

In Financial Advisory, operating revenue reflected growth across the business, with solid performance in M&A, Sovereign, and Capital Advisory. We continue to be a leader in the large, strategic, complex, and multi-national transactions that characterize the current M&A cycle. For the first quarter, approximately half of our announced transactions were cross-border. We were advising on almost one-third of global announced transactions valued at $10 billion and over. And we are the sole advisor to HJ Heinz on its combination with Kraft Foods, the largest transaction of the quarter.

In Sovereign Advisory, we continue to advise on some of the world's most high-profile and demanding assignments, including those in Greece, Ukraine, and Egypt. And our Capital Advisory business is active, especially in Europe, where we advised on some of the quarter's most prominent IPOs and capital raises, as well as balance sheet restructurings.

In Asset Management, operating revenue growth reflected the strength and diversity of our investment platforms. We generated record first-quarter management fees, despite capital markets and foreign exchange volatility. We achieved net inflows of $1 billion, driven by a broad range of equity and fixed-income strategies.

We are seeing steady investor demand across our platforms, especially for global, multi-regional, and emerging market strategies. Asset Management continues to have solid fundamentals, with leadership in growing asset classes. Two of our funds received Lipper Awards for their consistent risk-adjusted performance. And we continue to have significant capacity for organic growth across our Asset Management platforms.

Matthieu will now provide color on our financial results and capital management.

Thank you, Kenneth. Lazard's operating revenue increased 8% in the first quarter, while adjusted net income increased 27%, demonstrating the significant operating leverage of our business lift. The strengthening US dollar had an impact on our revenues, but because a large portion of our costs are delineated in foreign currencies, the impact on profitability was not material. Revenue growth reflected strength across the franchise.

Financial Advisory's record first-quarter operating revenue was driven primarily by a 9% increase in M&A and Other Advisory. Asset Management's record first-quarter operating revenue included a 5% increase in management fees. On a sequential basis, management fees decreased 3% from the fourth quarter of 2014.

In the first quarter of this year, AUM increased approximately 1% on a sequential basis. The increase was driven by net inflows of $1 billion, market appreciations of $8.9 billion, offset by foreign exchange depreciation of $7.9 billion. First-quarter net inflows were driven primarily by new mandates in our multi-regional and fixed-income platforms. As of April 17, our AUM was $205 billion, a $6 billion increase since March 31. The increase was driven by market appreciation of $4.3 billion, foreign exchange appreciation of $1 billion, and net inflows of $0.7 billion.

Turning to expenses, we're accruing compensation at a 55.6% adjusted compensation ratio, consistent with our full-year 2014 ratio. This compares to a 58.8% ratio in the first quarter of last year. Our adjusted non-compensation ratio for the first quarter was 18.3%, compared to 19.1% in the first quarter of last year. Non-compensation expense increased 3% as operating revenue grew 8%.

Finally, regarding capital management, in February, we refinanced a portion of Lazard Group's outstanding debt in order to reduce both our total annual interest expense and our total debt level. As a result of the refinancing, we expect interest expense savings of approximately $14 million in 2015. In the first quarter, we returned $343 million to shareholders, primarily through dividends and share repurchases.

In line with our capital management objectives, we have already repurchased enough shares to offset more than half of the potential dilution from 2014 year-end equity grants. With increased profitability, Lazard continues to generate substantial cash, and we are increasing our quarterly dividend by 17%, to $0.35 per share.

Ken will now conclude our remarks.

Thank you, Matthieu. A few words on our outlook before we open the call to questions. We have been saying for some time that we are cautiously optimistic. The US macroeconomic environment continues to strengthen, but Europe and many of the developing markets remain unsettled. Capital markets may continue to be volatile this year. As always, we are focused on the long term.

We have built a solid platform for profitable growth and Lazard is in an excellent position going forward. We have an unrivalled global network of relationships with key decision makers in business, government, and investing institutions. The breadth and depth of our senior level expertise is a powerful competitive advantage. As the only advisory focus firm with global scale, we are leaders in large strategic and cross-border assignments.

Asset Management is a world-class franchise with broadly diversified strategies and a global client base, and both our businesses have operating leverage with significant capacity for increased activity and organic growth. Now let's open the call to questions. Thank you.

(Operator Instructions)

We have a question from Ashley Serrao with Credit Suisse.

Yes, good morning. This is Marcus Carney filling in for Ashley Serrao. Congratulations on the quarter.

Hi, Marcus. Thank you.

A question on Europe, QE's beginning to lift asset prices in Europe. When you talk to CEOs in the region, what are you hearing? Conversely, what are you hearing from non-European CEOs as far as taking advantage of the weakening euro?

Look, QE is in a positive from the standpoint of obviously, the cost of financing and valuations in Europe and generally speaking, the European economic outlook has improved mildly overall since before QE. Generally speaking, I'd say our sense is that confidence is improving at the decision makers level in Europe CEOs, boardrooms.

Perfect, thank you. Moving to Asset Management, I wanted to drill down into the multi-regional product. Its been a bright area for you. Can you give us a sense of where the demand you're seeing is coming from and an update on your plans to grow the fixed income side of the house?

I think generally speaking, as you say, its been a good area for us. Demand is coming primarily from the US. It's just kind of right time, right place with product right now. On the fixed income side, we continue to do well in the emerging market debt product and the performance on our range of income products has been strong now for quite some time.

Perfect, thank you very much for taking my questions.

We'll go next to Alex Blostein with Goldman Sachs.

Great, good morning, everyone.

Hi, Alex.

A question on the M&A backdrop, so again, sounds like we're one quarter into 2015 and the market continues to be dominated by larger deals. Feels quite similar to what we saw last year. Your conversations with CEOs and corporate boards, where do you guys think we are in the cycle in terms of having some of this activity spilling into a smaller part of the market, so kind of middle market deals, et cetera? Are we still some ways off or what do you think is holding that part of the market back?

Actually, middle market activity has been okay. It hasn't been terrible. Our number of transactions are still pretty good in that particular marketplace. I think the headlines have been dominated, obviously, by the larger deals. When you look at the factors that drive M&A, the three we tend to focus on the most are CEO confidence, financing, valuations.

On the confidence front, I think the US improved last year into the year before, continues to be okay. Europe feels like it's improved a bit, as I mentioned a few minutes ago. Financing is very inexpensive, obviously valuations have risen a bit, but relative to the cost of money and to organic growth opportunities, they're probably aren't terrible. So consequently, the activity levels are pretty good at this moment in the larger part of the market, but there's no reason not to expect the same in the middle market.

Got you. My second question is around the operating leverage. I think on the prior call and I think you alluded to the same this time around that, with a reasonable backdrop in revenues, we should see continued operating leverage in the model given the steps you guys have taken over the last couple years. Any updated thoughts on that, just as far as maybe some sensitivity as far as revenues and how that would show up in the operating leverage in the model for this year?

Sure. I've talked about this before. There's two sources of operating leverage for our business when we have revenue growth. The first is on the non-comp side where, roughly speaking, between the two businesses about 2/3 is more or less fixed with inflation and the other third is variable to the activity levels of the business. So there's operating leverage there. Then second comes from a bit of operating leverage left on the comp side.

An asset works the marginal level of compensation is probably pretty close to the average so there's not as much room there, which is not unusual for us in management businesses at this stage of the cycle. On the advisory side, we still expect there's the marginal level of compensation will be below the average level of compensation, so there will still be some leverage there. But all this is against the backdrop of revenue growth, so we continue to be -- in a good revenue environment we should be able to continue to deliver operating leverage in the business.

We go next to Brennan Hawken with UBS.

Good morning.

Good morning.

So at the end of last year, you indicated that RFP activity had slowed in the year-end. Have you seen any change in that trend and maybe you could update us on that front?

Yes, it feels pretty good right now. Generally speaking, it's a little bit less than it was in 2014, but higher than it was in 2013. Again, it's more about the mix that is the size of the mandates as opposed to just the sheer number of them that come into the RFPs now. It feels pretty good right now.

Terrific. I know that you guys have spoken about being focused on the processes and operations in order to squeeze down the corporate headwind to your pretax margins. Can you help us think about that opportunity maybe in percentage points terms and sort of the timeframe we should think about how you're approaching that opportunity?

I think it's built into kind of the, I wouldn't say formula, but way I described the operating leverage in the business a few minutes ago. What we're really focused on is making sure that as much of the non-comp expense as we can is controllable and that wherever the compensation expense exists, it's adding value to the business.

We go next to Joel Jeffrey with Keefe, Bruyette, and Woods.

Good morning, guys.

Morning.

I apologize if I missed this a little bit earlier. Can you just talk about the mix shift within your Asset Management business and how that translated into the weaker than I think what we had expected management fees?

Yes. The change in the mix is really, if you look at the detail of our earnings release, you'll see the breakdowns by platform and you will see a little bit less of emerging market activities in global equities and a little bit more of emerging market debt and international equities, the multi-regional platform equity and that's what's driving some of this change in the mix. Not a huge one as you will see.

Okay, great. I appreciate you taking my questions, thank you.

(Operator Instructions)

We'll go next to Jim Mitchell with Buckingham Research.

Hi, good morning. Maybe just if you could remind us on your thought process on your debt footprint long-term? Obviously you refinanced and retired about $50 million on a net basis and you're carrying a little under $1 billion right now. Is that something that you think you'll just whittle away over time or is that a good number to think about or just how do you think about the long-term debt given your high cash flow?

At this point, we've pushed these maturities out so there's no, what I'd describe as, existential risk in the business associated with any debt maturities. This isn't a business you invest in for that. Then for us, excess cash gives us a lot of flexibility with excess cash to return to shareholders and if the opportunity comes a long to pay down additional debt (inaudible) positive, we'll do that. But we'd be very focused on what's going to drive shareholder return and doesn't adversely affect our credit situation.

Okay, so it's all about the tradeoffs?

Yes.

Okay, thank you.

We'll go next to Devin Ryan with JMP Securities.

Great. Good morning.

Hello, Devin.

So you guys highlighted cross-border activity and I know activity into Europe has been a positive theme for Lazard and so I'm just trying to get a little bit more perspective there. Is that theme being driven more just by the diverging currency levels? Or from a bigger picture perspective, is this really just an inevitable trend as firms globalize and they're just more open to expanding abroad? I just would just love some more perspective since that's been a nice story for you guys.

I think it's a little of everything. One is, obviously, Europe was at very low levels of activity in 2011 and 2012 and 2013 or really since the crisis and so kind of mid-year 2014 and we had I think a better than market year, substantially better than market year in 2014 in Europe. I think it's a function of a lot of factors. First, QE has helped valuations and has probably helped confidence a bit and so that helps drive M&A activity.

Second, currency, I mean it helps some, it hurts others, so you could probably find two sides to that story. Then third is, I think you hit it on the head, which is in a world which is somewhat starved of organic growth, M&A activity substitutes for that when you are looking at being able to grow your top line and drive cost efficiency. So that tends -- peoples' horizons now are broader than just one border, so it tends to drive cross-border activity.

Okay, great. Maybe just on the restructuring business and you think about the outlook for that business, are there any areas that could maybe drive some recovery there? We're hearing a little bit about energy is picking up a little bit for restructuring, but is there is anything that can move the needle for the outlook in that or energy is an example, just not enough to, at this point, to do much?

I think the areas which -- look, generally speaking, restructuring feels like it's at trough levels and as long as the economy, generally speaking, is sound and the financing environment is as easy as it is, you're not likely to see a substantial or broad-based pick up in the restructuring market. That said, we're seeing a tick up of activity in the oil and gas area, the whole energy area, and probably a little bit in retail as well, but I think that's more specific to situations.

Got it. Okay, thanks for taking my questions.

Okay.

We'll go next to Jeff Harte with Sandler O'Neill.

Good morning, guys. Nice quarter.

Thank you.

So on pretax margin, and I like kind of where I can start this question from, we're coming from 26%-plus, which is good, but if we look at the lower end of kind of your targeted range for non-comp and comp ratio, it suggests something closer to a 29% pretax margin with non-comp kind of being the big delta there. Is having a one-third of the non-comp base now be variable versus fixed? Does that give you enough flexibility for us to start talking about it a pretax margin pushing 30% anywhere in the near-term?

I'm not making any commitments to new margin targets at this point. I think we demonstrated a focus on being able to drive operating leverage in the business over the last few years and the future is the function of a number of things. One is obviously the operating environment. This business does well when revenues are going up with regard to margin, but also, we are periodically investing in the business.

Since we're going to have to, in effect, expense all of our investments given that it comes from comp, generally speaking, we're kind of cautious about saying exactly where we're going to be in any given quarter or any given year right now. But I think generally speaking, as revenues improve, there is operating leverage on both the comp, at least on the advisory side to some degree, and on the non-comp expenses.

Okay, and finally, on the buyback, so [185 million] I guess is similar to last year. Should we look at that as just you tend to do it first end or front end loaded, as far as buyback activity? Or is there any potential read through to maybe favoring buybacks a little more than like special year-end preferred dividends you've done the last couple of years?

Look, we're going to be opportunistic with regard to return on capital and focus on the way that we think most effectively drives shareholder value and is consistent with our model; that is, one which where we, generally speaking, have a better handle on the year as we get closer to year-end. If you look at what we've done over the last several years, we have, in every year, more than offset the dilution associated with any of the share grants.

Opportunistically bought shares when we thought there was opportunity to do so and returned any excess cash, either through dividend or special dividend, and then in some cases, pay down debt. I think we're going to continue to do the same thing. It's just a good model for our business.

Okay, and I ask it from the perspective of liking the special dividend. I'd like to see, actually, more companies do that.

Yes.

Okay, thank you.

We like it, too, as you can tell.

We'll go next to Steven Chubak with Nomura.

Hi, good morning.

Morning.

Ken, I appreciated the general commentary that you provide on the RFP backlog. But when thinking about the trajectory for the fee rate going forward, I was hoping you can give us a sense as to how the demand outlook currently is for some of the higher fee products, specifically emerging markets equity, and whether we've seen any, has the improvement that we've seen in the [EME] market proxy actually translated into any pick up in demand?

Look, generally speaking, RFP activity feels good to us. We have a lot of capacity in a broad range of products. As you know, the large EME fund has been closed since 2010, so the growth in our business and the incremental fee has come from many of the other products that we've introduced or have been opened. We continue to think we've got a good mix of products that are attractive to our investing base and have good economic outlook for Lazard.

Okay, thank you. Then just one quick follow-up, just switching over to the advisory side, I know you don't like to speak on individual deals, but was hoping you could provide some general commentary on some of the challenges or obstacles facing larger transactions given anti-trust pressures, some of which we've been hearing about more and more, at least in the current environment.

I think you have to separate what's going on in the sort of cable/telecom/internet space, perhaps from the larger activity. Generally speaking, early in the cycle, you saw a lot of deals take place, which had a lot of high -- it was a conservative environment. There weren't that many big deals taking place and when they did happen, they tended to be straight down the center of the fairway and deals that are straight down the center of the fairway tend to have a lot of savings and therefore potentially a lot of overlaps and therefore tend to be tougher anti-trust deals, which is why I think there's a general impression that it's a tougher anti-trust environment than it has been in the past.

But I think you have to look at the nature of the deals themselves to assess that. I think the recent activity in the telecom/internet sector, the whole cable area, there's a lot of public policy issue involved in that, so I think it's a slightly different analysis than the traditional anti-trust analysis.

We'll go next to Patrick O'Shaughnessy with Raymond James.

In your 10-K filing, there was some commentary about steps that you've taken to act as an underwriter in public offerings to support your Financial Advisory business. The question is, is this something that your think could be a meaningful opportunity for Lazard going forward, specifically with regard to underwriting? Or is this just kind of a, it's nice to have and maybe something will play out over time?

Our core focus is on the Advisory business and we're really very focused on providing great advice to companies, both on the strategic side, as well as the capital side; that is, understanding and providing advice around balance sheets. Risk taking isn't in our model.

Great, thank you.

We'll go next to Vincent Hung with Autonomous.

Hi, good morning. Just on announcement fees, can you say whether the benefit is up meaningfully versus last year?

I'm sorry, can you repeat the question?

On announcement fees, can you say whether the benefit is up meaningfully on last year?

I don't think the mix is terribly different from last year, no.

Okay, and just on announcements year-to-date, it's clear that you're quite busy. Aside from restructuring, where do you think you're relatively quiet?

Quiet? It's a pretty good market right now and it's always dangerous to say we're firing on all cylinders, because you're never really firing on all cylinders. I think there's activity in healthcare, obviously, activity in the consumer side, and we've seen, as I said earlier, a little tick up in oil and gas on the restructuring side and it continues to be a fair amount of activity in the tech/media/telecom area for us. So it's pretty well-distributed at the moment. It's probably a little quieter than most other sectors relative to the size of the sector itself, just given the regulatory concerns still.

Okay, thanks a lot.

This now concludes the Lazard Conference Call. Thank you for your participation.

Thank you.